GKN: Proposed Takeover by Melrose

Graham Stringer Excerpts

Thursday 15th March 2018 Westminster Hall

[Mr Bob Seely (Isle of Wight) (Con)]

Does the hon. Gentleman agree that in many cases Melrose aims to own businesses for only between three and five years, and during that time seeks to maximise shareholder value, selling on the parts of those businesses that it sees as underperforming, sometimes without regard to the long-term benefit of the business and its individual plants? Therefore, a takeover by Melrose may mean a break-up of GKN. Does he share my concerns and those of others like me, who are fearful for the GKN plants in their constituencies? There is one in the Isle of Wight.

[Graham Stringer (in the Chair)]

Order. I would remind Members that interventions should be brief.

[Mr Bailey]

The hon. Gentleman has put his finger on an issue that I will develop at some length during my speech. He is absolutely correct.

Perhaps I should state that, from a philosophical or ideological point of view, I am not anti-private sector. I am not anti-City. I recognise that globalisation is a potential force for good, even though it does throw up some considerable challenges and needs to be managed. I feel, however, that the role of Government must be to ensure that where vital national interests are at stake, the private sector is regulated in such a way that those interests prevail over what are often the short-term or illusory interests of the shareholders involved or the myriad City professionals and advisers that tend to make a lot of money from takeover bids. Some of the issues that arise from this proposed takeover bid are specific to GKN and Melrose, but others throw up broader, national issues.

GKN is a company of enormous strategic importance to the British economy. In 2015, it made sales of more than £16 billion worldwide and contributed £1.36 billion to our economy. It is one of the major—perhaps the major—tier 1 providers within the automotive and aerospace industries.

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[Several hon. Members rose—]

[Graham Stringer (in the Chair)]

Order. Five Back-Bench Members want to speak, and the arithmetic is straightforward. I intend to call the Scottish National party spokesperson at 4 o’clock, so I hope that people will respect that time.

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[Chi Onwurah (Newcastle upon Tyne Central) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Stringer. I thank my hon. Friend the Member for West Bromwich West (Mr Bailey) for calling this important debate and acknowledge the many impressive contributions by Members on both sides of the Chamber. We heard that GKN is one of the world’s oldest and most prestigious engineering firms. As an engineer myself, I can imagine people’s pride at knowing they are following in such an illustrious tradition. I appreciate the pride of the hon. Member for Redditch (Rachel Maclean) and my hon. Friend the Member for Caerphilly (Wayne David) at having GKN in their constituencies, and that of other Members, too.

GKN is at the centre of the fourth industrial revolution, boasting of strengths in defence, aerospace, automotive, batteries and the internet of things. My hon. Friend the Member for West Bromwich West set out the significance of its economic contribution, and my hon. Friend the Member for Birmingham, Erdington (Jack Dromey) emphasised the significance of its investment in R&D in the United Kingdom. As the shadow Minister for industrial strategy and a chartered engineer, I believe that all those factors make GKN an important part of our future innovation economy. As my hon. Friends the Members for Birmingham, Northfield (Richard Burden) and for Caerphilly emphasised, it plays an important part in our national security, too.

Members on both sides of the Chamber critiqued the Melrose bid. Unite, which represents most GKN workers, has called the bid “predatory” and Melrose an “asset-stripper”. It calls for the Government to halt the bid, as does the Chair of the Business, Energy and Industrial Strategy Committee, my hon. Friend the Member for Leeds West (Rachel Reeves). Melrose contests that, but admits that it would cut GKN’s management, deliver a “fundamental” culture change, sell sections of the company and boost the firm’s profitability through what its CEO calls

“the catharsis of a change of control.”

It sounds like Melrose is an advocate of Schumpeterian creative destruction, but with little regard for what is destroyed or, indeed, created. In practical terms, that could mean the closure of sites and divisions across the UK, the loss of jobs, a threat to pensions, as we heard, and the disappearance of crucial engineering expertise.

As my hon. Friend the Member for Birmingham, Erdington emphasised, Melrose’s record does little to assuage those concerns. It does not make purchases for the long term. The biggest example is its stewardship of Brush Turbogenerators, bought as part of FKI in 2008. Since then, the firm has had five different managing directors, and just last month it announced that it would cut up to 270 jobs in Loughborough and shift production overseas, despite the fact that last year Melrose paid out bonuses worth £160 million to only four people. My hon. Friend the Member for Redcar (Anna Turley) remarked earlier this week that meeting representatives from Melrose was like “meeting neoliberalism in person.”

However troubling we might find Melrose’s practices, this is not about just one company; it is about how our economy works. The Secretary of State for Business, Energy and Industrial Strategy hosted and attended the first meeting of the University College London commission for mission-oriented innovation and industrial strategy, chaired by world-leading economist Mariana Mazzucato. In her new book, she argues that the “two faces of financialisation” are at the heart of capitalism’s fundamental failure. The first is the way in which the financial sector has stopped resourcing the real economy—making stuff. Instead of investing in companies that make stuff, finance is financing finance.

The second aspect is the financialisation of the real economy, with industry driven by short-term returns, which results in less reinvestment of profits and rising burdens of debt in a vicious cycle, which makes industry ever more driven by short-term considerations. Such finance is not neutral but changes the nature of what it finances. As we have seen in Melrose’s approach to managing Brush, its short-termism has led it to neglect the difficult, costly business of maintaining sunk assets such as factories or developing new technologies, such as those we heard about in the automotive sector. Melrose’s expenditure on R&D is proportionally less than a fifth of GKN’s.

Melrose’s track record indicates that it will focus on strategies such as offshoring jobs that neglect people and places but provide an immediate financial return. A Melrose takeover would therefore lead to the financialisation of GKN, placing UK jobs under threat and eroding our industrial base. That was very much the point made by Tom Williams, the chief operating officer of Airbus, when he said it would be practically impossible for his company to give new work to GKN after a Melrose takeover.

The debate is not about Melrose alone but about how our country’s economy works. As the Leader of the Opposition said last month at the EEF conference:

“The next Labour Government will be the first in 40 years to stand up for the real economy. We will take decisive action to make finance the servant of industry, not the masters of all.”

In the immediate term, as Members on both sides have said, there are powers that the Government can use to stop the Melrose takeover. When I mentioned that in the Chamber to the Secretary of State, he said, correctly, that according to the Enterprise Act 2002 he could intervene

“only in mergers that raise public interest concerns on the grounds of national security, financial stability or media plurality.”—[Official Report, 13 March 2018; Vol. 637, c. 711.]

As others, including Unite and the BEIS Committee have made clear, the proposed takeover raises national security concerns, given GKN’s close involvement with sensitive defence projects. While the Minister cannot answer in detail, will he answer in principle whether the Government believe that Melrose’s proposed takeover could raise public interest concerns on the grounds of national security? Will he explain what process the Government will go through in reaching a conclusion?

The Secretary of State also praised his Government’s corporate governance reforms, which

“have ensured that GKN had longer to prepare its defence, preventing the kind of smash and grab raid that Cadbury’s was subjected to under the previous Government”.—[Official Report, 13 March 2018; Vol. 637, c. 711.]

That has been mentioned in the debate. Kraft’s takeover of Cadbury in January 2010 did prompt changes to the takeover code in 2011 and further amendments to the takeover regime with the Enterprise and Regulatory Reform Act 2012, which set up the Competition and Markets Authority. I served on the Bill Committee, when Labour proposed amendments to strengthen the new CMA and broaden the scope of the public interest test. For example, one amendment would have allowed the Secretary of State to consider the effects of the proposed merger on the long-term competitiveness of the UK economy as part of the public interest test.

I sat and watched as the Government voted down amendment after amendment that would have provided them with a framework to act. Will the Government now explore and legislate for the expansion and broadening of the public interest test, which they failed to do six years ago? That would not be without precedent—for example, the financial stability clause, added in 2008 during the financial crisis. Can we tighten the financial stability test to include considerations of long-term financial viability, as suggested by the hon. Member for Paisley and Renfrewshire South (Mhairi Black)?

Only this morning, Unilever announced that it will relocate its headquarters from London to Rotterdam. One key factor in that decision was the greater protection afforded to the company by Dutch takeover law. Will the Government look at improving the protection offered by takeover rules to British companies?

Both Dana and Melrose have questions to answer with regard to the future of pension schemes that GKN is currently responsible for. Will the Minister explain what assessment has been made of the schemes and what assurances the Government have sought?

The Secretary of State talks of building an economy for the long term, just as his predecessor did. This is a litmus test for his industrial strategy. It cannot hold if time and time again our most successful and innovative companies are taken over and then taken apart. Investing in innovation is a long-term bet; Melrose is a short-term player. Do the Government have the will to build a high-skill, high-wage, high-productivity economy, or is casino capitalism what our future holds?

[Graham Stringer (in the Chair)]

Before I call the Minister, I ask him to leave three minutes at the end to allow Adrian Bailey to sum up.